I was recently reading an article on how to fix Social Security and was struck by the similarity of issues with our own Defined Benefit vs. Defined Contribution (DB vs DC) debate.

As you know, a DB plan is a retirement plan based on a formula which guarantees a pension to the retiree. It can be calculated In advance with certainty. Typically the formula is years of service times a percent of pay times average pay. By contrast a DC plan does not guarantee a pension amount. The employer and/or employee are permitted to contribute a specified amount. The pension amount is dependent upon how well investments perform.

First of all, let us remember that events do not occur in a vacuum. The Social Security and DB vs DC debates are occurring now for several of the same or similar reasons, two of which are: (1) baby boomers are concerned with their security and financing their retirement; and (2) the stock market has performed exceedingly well since 1982.

Americans are pragmatic. We look for practical solutions to problems. If one does not work we try another solution. So now we are fishing around for ways to enhance retirement income without a lot of pain. Pragmatists also make mistakes and try to learn from them. However, if errors are made in privatizing Social Security or converting IMRF to a DC plan they will not be known for 10, 20 or 30 years. It will be too late to correct for those who retired in the interim. These are not the type of issues to experiment with - we have to get if right the first time.

To paraphrase the article, a rush to reform IMRF (just like Social Security) would be a mistake. There are plenty of reasons to look at the conversion of DB plans to DC plans with a very skeptical eye.

One reason to be skeptical is that much of the money behind the fervor to convert to DC plans comes from third party administrators, banks, insurance companies and investment firms which will make vast amounts of money at the expense of IMRF members. Currently all IMRF administrative expenses and Investment expenses are about 44 cents for every $100 invested. Third party administrators such as VALIC currently charge about $1.25 cents per $100 in assets to administer a DC plan. When you invest money with VALIC, you pay both VALIC's fee plus an investment management fee. Investment fees for mutual funds can range from another 95 cents to $1.25 or more. For purposes of argument, let's say the investment fees total $1.00. When you add VALIC's fee to the investment management fee, it will cost a pubic employee $2.25 per $100 invested. If you earn 10% an your Investments the net increase will be only 7.75%.

The IMRF investments trust currently totals more than $14 billion. Two dollars twenty cents ($2.25) per $100 of assets equals $315 million. Currently, IMRF pays less than $65 million for both administrative and investment expenses. So you see, the DB vs DC debate is also a question of who gets to keep $250 million: the investors (i.e. IMRF employees and employers) or Wall Street?

A related question is who pays? Under IMRF and the typical DB plan, the costs of administration and Investment costs are paid by employers. Under the typical DC plan, the costs are borne by the participants through deductions from their individual account. Thus some of the motivation by employers for the conversion to DC plans comes from this cost shifting. Can public employees pay $315 million a year more to fund their pension plan?

Another reason to be skeptical is that the DC proponents have vastly oversold their case and overstated the problems facing DB plans. Their basic case is that DB plans are too expensive and difficult to budget for governments to afford and too inflexible for mobile members (no portability, no loan options, no investment choices). DC plan proponents would also have you believe everyone is fleeing DB plans to set up DC plans and that only the fools and the dinosaurs (monikers none of us like) are clinging to DB plans.

This is marketing glitz. How sound are the arguments? What are the facts? The comprehensive financial security package IMRF furnishes (death, disability and retirement benefits) is not cheap. But it is not outrageously expensive. The average IMRF employer will pay 8.16% in 2O00 to fund the regular IMRF program. Down from 9.98% in 1996. In fact, average rates have declined since 1989.

In 2000, the average normal cost for each new year of service credit will be 7.17%. Death benefits are 0.20%; disability 0.15%, 13th checks 0.62% and unfounded liabilities negative 0.41%. The early retirement incentive is costing about 0.43%.

If you compare apples to apples, that is to provide similar retirement benefits at similar employer cost, the DC plan employer contribution should be about 7.17%. But what about the other benefits? In discussions I have heard, there is agreement that employers will surely wish to furnish death and disability protection (inflation protection is ignored). Can they purchase it lot 35 cents out of every $100 earned? I don't know. But I am not aware of anyone having calculated the cost either. A consideration is that insurance companies will likely provide the protection, and they have a profit factor built in on top of the cost of benefits and administration. A related Issue will be the public relations factor to the employer when claim approvals are being made by insurance company personal rather than an organization dedicated to employee and employer interests.

The 8.16% rate is average for all IMRF employers. Thirty-five (35) percent of our employers pay less than 8.00%. Two hundred seventy seven (277) employers pay less than 2.00% for the entire IMRF package. What will happen to their rates when a DC plan is implemented? On the other extreme, 16% of our employers pay 12% or more. This includes the sheriff's law enforcement program, which is targeted at public safety employees with higher benefits. It should always be remembered that those employers with higher than normal costs are the result of large unfunded liabilities. Those unfunded liabilities will need to be paid even if the employer converts to a DC plan.

I have heard it said that actuarial expenses are a big cost item for DB plans which can be avoided with a DC plan because DC plans are not designed to provide a guaranteed benefit for a retiree's lifetime. In 1998, IMRF paid $114,300 for those services or $40.77 per employer. (That cost was previously included in the 44 cents per $100 of assets to determine IMRF administration charges.)

How hard is it for the employer to budget for IMRF? The actuaries set a unique rate for each IMRF employer. Contribution rates are calculated in a way to try to level them out over time. Small employers typically experience larger annual adjustments. Between 1998 and 1999 (our most recent data) 33% of IMRF's employers saw a rate decline of between - 1% and - 21%. Fifty-nine (59%) percent of the employers saw a rate change plus or minus one (1%) percent. Only 8% of the employers saw their rate increase by more than 1%. Rates are announced eight months in advance to accommodate employers' schedules for budget development.

It is also not true that there is a mad rush to convert from DB to DC plans. The vast majority of the growth of DC plans in the private sector has been among small employers who, prior to adopting a DC plan, did not have any retirement plan for their employees. Onerous federal reporting and IRS requirements discourage small private sector firms from establishing DB plans. DC plans are much simpler for them to create and administer. For larger private sector companies that already had DB plans; they have not abandoned those plans - they have simply added a DC plan (402K) alongside their base DB plan. This is similar to the three-legged stool concept that IMRF supports. In the public sector the onerous federal reporting and IRS negotiations do not apply.

On The employee side of the equation, we are being told employees demand portability, loan options and investment choices. Other than disappointment over not receiving interest when a refund is taken, there has not been a hew and cry from members angry about their inability to borrow from IMRF or their lack of investment choices.

With respect to portability, the underlying argument feeds on the fear of job security and some notion that people change jobs more frequently than before.

Job security is a concern for us all, and I do not wish to ignore the fear people have. How big of an issue is it for public employees? Many large private firms have downsized. But as responsibility for social services shifts from federal to state and local government, will there be the same opportunity to downsize local government? Besides, what does government do? It provides personal services. It does not mass produce commodities. Can technology replace 30%, 40% or 50% of the employees at the Village Hall?

How mobile is the US labor market? Information provided by the Employer Benefit Research Institute states the median job tenure for all US workers was 3.4 years in 1951 and 4.5 years in 1991. The fact of the matter is that the younger you are, the more likely it is you will change jobs. That report also indicated that in any given year the numbers of people who change employers are:

Age	16 - 24:	47%
	25 - 34:	20%
	35 - 44:	13%
	45 - 54:	9%
	55 + :	7%

These numbers apply both to the public and private sectors. People do change jobs. But, it is not any more of an issue than 40 years ago. At IMRF, the experience has been that of the 148,610 members 77% will eventually receive a retirement, death or disability benefit from IMRF. Although our members change jobs, 3 out of 4 remain in IMRF

At this point it should be acknowledged, that in a generic sense, a DC plan is more beneficial to the young short service employee, whereas a DB plan is geared more toward the career employee. As hundreds of letters from our retirees have indicated - the young, short service perspective can change before you know it. Frequently, people wind up working longer with an employer than they ever expected. And, as the member grows older, their knowledge and recognition of retirement grows.

Portability is addressed in several aspects of the IMRF program which warrants repeating. A person can work for any one of 2800 IMRF employers and continue to contribute to IMRF and build his/her retirement security. IMRF also has reciprocity with all major public pension plans in Illinois. However, the most significant portability feature to IMRF is its money purchase component - a DC feature. For vested members terminating employment before retirement age, IMRF will pay the greater of the DB - formula or the annuity purchased by the earnings in the DC plan.

As good as these portable aspects are (better than in private sector DB plans),they can be improved. IMRF is investigating this aspect of our DB plan and will work to improve it.

When it comes to loan features, the ability to access retirement monies is appealing. But even with DC plans, the access is strictly controlled and you must repay loans within timelines established by the IRS> People on both sides of the debate would acknowledge that short sighted thinking by employees could irreparably harm the accumulation of assets for retirement.

With respect to investment options, it should be remembered IMRF is a highly diversified investment trust with investments in the US and foreign stock and bond markets, real-estate and alternative investments such as timber and venture capital. Our sheer size and annuity (i.e. perpetual investment horizon) gives us an advantage. We are always investing in the current "hot" investment market. And, we can hold on to the "cold" investments until they turn around. Luxuries individual investors with shorter time horizons do not have.

I have heard it said, that there are two types of persons building a retirement nest egg: the savers and the investors. The savers make sure they put their money away and want it to grow. The investors actively manage their money with the hope of achieving a higher return. DC plans require substantial investments in education to make their participants aware of their choices and to provide a framework to make the optimal investment decisions. I have also learned that most people are savers. They are not interested in learning how to invest and wish to delegate that responsibility. That is a reasonable approach. I have also learned that after intensive education, more people become investors but the vast majority remain savers.

The people clambering for investment choices are the investors. That minority wishes to push the majority along even though the majority is content to delegate this responsibility.

That having being said, some members are comfortable in directing their investment choices. They can do that through their IRAs, 457s, and 403Bs. Personally, I've come to understand my portfolio is diversified if I view IMRF as my fixed Income portion and Invest other monies (IRAs, 457s and 403Bs) Into equities.

Finally, conversions to DC plans would raise more problems than solutions.

With DC plans, employees assume the entire risk for their pension planning. And, they will probably pick up the entire cost of the additional $250,000,000.00 in administrative and investment expenses.

While the stock market historically has done better over the long run, a prolonged dip, as happened in the 1960s and also in the l970s, could erode a retiree's nest egg. If employees are free to invest their accounts as they wish, what happens it they make a major mistake? Will they stay on the job longer at a higher salary preventing upward movement of young lower paid employees? Will they demand and negotiate for higher employer contributions to DC plan? Will they ask for help from their employer? And while in retirement, will they use more social services and need financial assistance through Medicaid and welfare? Will they come back to the Illinois General Assembly and seek help?

As you can see, the problems do not go away when you adopt a DC plan. The nature of the problems changes.

Increasing life expectancy drives up the cost of DB plans. But it also makes use of a DC plan more complex and uncertain. A retiree does not outlive his/her DB benefit. But a DC participant can. Are employers prepared to educate their employees on how to make sure they do not outlive their benefits? What will employers and society do with the penniless 86 year old retiree who miscalculated and thought he would be dead before that age?

Even If conversion to a DC plan is legislated, all IMRF employers should expect to be responsible for both plans for 30 or 40 years after the conversion. This is because participation in IMRF is a protected constitutional right which cannot be diminished. That means current employees cannot be forced out of IMRF. New hires with IMRF service through other IMRF employers or reciprocal service through other Illinois public employment have a protected right to remain in the defined benefit plan. So even new hires will have to be enrolled in the DB plan years after the conversion to a DC plan. The responsibility for funding dual plans will continue for many years.

There are numerous other issues to consider. But I believe the point is already made: conversions to DC plans will not magically solve the budget constraints of local government and can not guarantee a financially secure retirement for employees. As in all complex matters. the truth lies somewhere in between. It is for this reason that IMRF has endorsed the concept of the three legged stool. Our members need a DB plan, Social Security and personal savings (through a DC plan) to build their retirement nest egg. Each of the legs are imperfect. Each has its intrinsic short comings. But when you take them together the weaknesses of one type of retirement plan are made up by the strengths of the others. The three legged stool is not old fashioned. It is not paternalistic. It is not a dinosaur. It is a solid platform an which to build financial security in retirement.